Does state capacity matter for foreign aid effectiveness? Panel data evidence on water from 87 countries

ABSTRACT

This study attempts to measure how the effectiveness of aid to the drinking water sector is mediated by state capacity. I use panel data on a sample of 87 aid-receiving countries, with the Bureaucratic Quality Index as a measure of state capacity. Employing random effects, fixed effects, and system GMM techniques, the study empirically and robustly finds that state capacity does not have a significant positive mediating impact on aid effectiveness in increasing access to improved water sources. I also find that the mediating impact of state capacity is contingent on the level of democracy in aid-receiving countries.

KEYWORDS:

• Foreign aid
• water supply
• sustainable development
• state capacity
• democracy
• mediating impact
• panel data

Acknowledgments

The author would like to express his gratitude to Associate Professor Eduardo Araral Jr. of the Institute of Water Policy at the Lee Kuan Yew School of Public Policy in Singapore for his guidance and advice in the conceptualization and execution of this study.

Disclosure statement

No potential conflict of interest was reported by the author.